Stock Selection using the Data Envelopment Analysis Models and DuPont Analysis

Abstract

Analysing performance using the financial ratio is challenging for many investors and researchers. The purpose of this study is to evaluate efficiency performance of decisionmaking units (DMUs) which is stocks company of using production frontier-based and accounting-based approaches. Thus, the data envelopment analysis (DEA) models and DuPont analysis were applied. Specifically, DuPont analysis was utilized to evaluate three different aspects: profitability, the efficiency of assets utilization and financial leverage. The return on equity (ROE) was calculated to rank the companies' performance. Meanwhile, the estimation method of DEA computed the efficiency scores and ranked the companies accordingly based on the ROE, return on assets, earnings per share, net profit margin, price to earnings ratio, debt to equity ratio and asset turnover. The major results showed that DMUs (company) gave different picture performance rankings with different approaches. The finding also revealed that the results from DEA method, gave more comprehensive analysis in term of efficiency measurement, whereas DuPont presented good analysis because it provided information for investors if the highest return is the main objective for them. Additionally, the analysis also provided an indication whether a company can earn a higher return if it generates a high net profit margin; if it uses its assets effectively to generate more sales and if it has a high financial leverage.

Analysis of Pfizer Profitability Based on Dupont Analysis Method

“…Variations in the various indicators of the DuPont analysis method will cause changes in other indicators. Finally, the results will be fed back into the net interest rate of equity [3]. According to the needs of the analysis, the indicators can also be further split and analyzed.…”